2011 (3) TMI 604 - HC - Income Tax

Disallowance - on account of pension - Mr. Agarwal contends that in the case before us, the pension scheme created by the resolution of the Board of Directors is not an approved superannuation fund and as such, the same is not entitled to deduction - the liability created by the resolution is although not covered by the instances indicated in Section 36, yet, is definitely of the nature of the liabilities mentioned therein and therefore, being of the same nature, it must conform to those provisions in order to get benefit of such deduction - It is preposterous to suggest that an expenditure of the nature provided in any of the provisions of Sections 30 to 36 of the Act, although not covered by those provisions, would be allowed under the residuary Section - Held that expenditure in the nature of those mentioned in Sections 30 to 36 but actually not coming within their purview or in excess thereof, cannot get the benefit of Section 37 of the Act - Moreover, even after compliance of the provisions of Section 36 of the Act, an assessee is not entitled to such claim without further complying with the provisions of Section 40A (9) of the Act whether the assessee was entitled to the benefit of Section 37 of the Act in a case where the expenses is in the nature of one mentioned in Section 36 but is not an approved one and at the same time, the deduction of expenses was claimed on the basis of a liability created by a resolution of the board of directors of the company which is capable of being reversed by a subsequent resolution - it is well known, is an authority for what it decides but what necessarily follows from such decision is not to be taken as a precedent - answer the first question in the affirmative and the second one in the negative

Issues Involved:
1. Justification of Tribunal in not allowing the sum of Rs.1,43,35,000/- as liability on account of pension.
2. Allowance of liability on account of pension for the period till the death of the employees or limited to the accounting year relevant to this assessment year.

Detailed Analysis:

Issue 1: Justification of Tribunal in not allowing the sum of Rs.1,43,35,000/- as liability on account of pension.

The assessee claimed a deduction of Rs.1,43,35,000/- on account of unfunded actuarial liability for pension for certain categories of employees, maintaining its accounts on a mercantile basis. The Assessing Authority disallowed this claim, citing a previous order that death pension was not admissible. The Commissioner of Income Tax (Appeal) upheld this, noting that the actual liability for the year was only Rs.23,04,228/-, which was paid. Before the Tribunal, the assessee argued that the liability crystallized during the year under the mercantile system of accounting, thus entitling them to the deduction. However, the Tribunal dismissed the appeal.

The Court noted that under Section 40A(9) of the Income-tax Act, 1961, only deductions for contributions towards recognized provident funds, approved superannuation funds, or approved gratuity funds are allowed. The pension scheme in question was not an approved superannuation fund, thus not entitled to deduction. The Court agreed with the Revenue's contention that the liability towards an unapproved pension scheme does not qualify for deduction under Section 36 or Section 40A(9).

The Court emphasized that for an expenditure to be deductible, it must fall strictly within the provisions of Sections 30 to 36 or the residuary Section 37 of the Act. The resolution by the board of directors creating the pensionary liability did not meet these criteria. The Court also highlighted that allowing such deductions could lead to potential abuse, where companies might create liabilities through resolutions without actual intent to pay, thereby enjoying tax benefits.

Issue 2: Allowance of liability on account of pension for the period till the death of the employees or limited to the accounting year relevant to this assessment year.

The Court found that the liability created by the resolution, although not covered by Section 36, was of a similar nature and thus must conform to those provisions to get the benefit of deduction. The Court rejected the argument that such liabilities could be allowed under the residuary Section 37, as it would undermine the restrictions in Sections 30 to 36.

The Court further noted that a resolution by the board of directors could be modified or reversed, which is why the legislature imposed restrictions in Section 36. By taking an "avoidable" promise, an assessee cannot claim the benefit of the expenditure without complying with Section 40A(9).

The Court also reviewed various precedents cited by the assessee, including Bharat Earth Movers vs. Commissioner of Income-Tax, Commissioner of Income-Tax vs. National Insurance Co. of India, and others. However, the Court found these cases inapplicable as they did not address the specific issue of unapproved superannuation schemes and the requirements of Section 40A(9).

In conclusion, the Court upheld the Tribunal's decision, answering the first question in the affirmative and the second in the negative, thereby dismissing the appeal. The Court emphasized that the expenditure must strictly comply with the statutory provisions to be deductible.

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